REVENUE RECOGNITION

9 Months Ended

Sep. 30, 2021

Revenue from Contract with Customer [Abstract]

REVENUE RECOGNITION

2 – REVENUE RECOGNITION

In May 2014, the FASB issued ASU No. 2014-09 (Topic 606) titled, “Revenue from Contracts with Customers.” Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605), and requires entities to recognize revenues when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company’s customers currently consist primarily of its VIPs.

Revenue Recognition

The Company generates revenue from the sale of products and services. Revenue is recognized when control of the products or services is transferred to its customers in a way that reflects the consideration the Company expects to be entitled to in exchange for those products and services.

The Company determines revenue recognition through the following five-step model, which entails:

1)	identification of the promised goods or services in the contract;
2)	determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract;
3)	measurement of the transaction price, including the constraint on variable consideration;
4)	allocation of the transaction price to the performance obligations; and
5)	recognition of revenue when, or as the Company satisfies each performance obligation.

Service revenue

Service revenue is recognized when the underlying training or other services are performed. Unearned revenue reported on the balance sheet as contract liability represents the portion of fees paid by customers for services that have not yet been performed as of the reporting date and are recorded as the service is rendered. The Company recognizes this revenue over the twelve-month life of the contract. Provisions for discounts are provided in the same period that the related revenue from the products and/or services is recorded.

The Company enters into programs that may provide for multiple element deliverables. Commencing in 2018, the Company began enrolling medical and dental professionals in a one-year program (which has evolved into the VIP program) which includes training in a highly personalized, deep immersion workshop format which provides the dentist access to a global team who is dedicated to creating a successful integrated practice. The key topics covered in training include case selection, clinical diagnosis, appliance design, adjunctive therapies, instructions on ordering Company products, guidance on pricing, instruction on insurance reimbursement protocols and interacting with its proprietary software system and the many features on the Company’s website. The initial training and educational workshop is typically provided in the first month that a dental practice enrolls in the VIP program. Since VIPs are able to begin generating revenue after the first training workshop, the Company recognizes 50% of the service revenue in the second month of enrollment and the remaining 50% pro rata throughout the following eleven months of the service contract. Ongoing support and additional training is provided throughout the year and includes access to the Company’s proprietary Airway Intelligence Service (“AIS”) which provides the VIP with resources to help simplify the diagnostic and treatment planning process. AIS is provided as part of the price of each Vivos System appliance and is not a separate revenue stream. Following the year of training and support, the VIP may pay for seminars and training courses that meet the VIP’s needs on a subscription or a course-by-course basis. In addition to enrollment service revenue, the Company offers and expects to offer additional services, such as its Billing Intelligence Services offering, and orofacial myofunctional therapy services, which was introduced in April 2021. Revenue for these services is recognized monthly during the month the services are rendered.

The Company identifies all goods and services that are delivered separately under a sales arrangement and allocates revenue to each deliverable based on relative fair values. Fair values are generally established based on the relevant service period which approximates the prices for relevant training that would be charged if those services were sold separately. In general, revenues are separated between durable medical equipment (product revenue) and education and training services (service revenue). The allocated revenue for each deliverable is then recognized ratably based on relative fair values of the components of the sale. Revenue from training is recognized over the relevant service period (i.e., as the Company satisfies its performance obligations and creates value for the VIP). The Company also evaluates the impact of undelivered items on the functionality of delivered items for each sales transaction and, where appropriate, defers revenue on delivered items when that functionality has been affected. Functionality is determined to be met if the delivered products or services represent a separate earnings process.

From time to time, the Company offers various discounts to its customers. These include the following:

1)	Discount for cash pay in full
2)	Conference or trade show incentives
3)	Negotiated concessions on annual enrollment fee

The amount of the discount is determined up front prior to the sale. Accordingly, measurement is determined before the sale occurs and revenue is recognized based on the terms agreed upon between the Company and the customer over the performance period. In rare circumstances, a discount has been given after the sale during a conference which is offering a discount to full price. In this situation revenue is measured and the change in transaction price is allocated over the remaining performance obligation.

The amount of consideration can vary by customer due to promotions and discounts authorized to incentivize a sale. Prior to the sale, the customer and the Company agree upon the amount of consideration that the customer will pay in exchange for the services the Company provides. The net consideration that the customer has agreed to pay is the expected value that is recognized as revenue over the service period. Any overpayments are refunded during the reporting period so that no refund liability is recognized. At the end of each reporting period, the Company updates the transaction price to represent the circumstances present at the end of the reporting period and any changes in circumstances during the reporting period.

In early 2021, the Company entered into its first agreement through its Medical Integration Division (“MID”). The purpose of the MID is to assist VIP practices in establishing clinical collaboration ties (called Pneusomnia Centers) with local healthcare professionals who routinely see or treat patients with sleep and breathing disorders. MID generates revenue through a one-time development fee and recurring management fees. The development service fee is for the sum of $60,000. Fifty percent (50%) or $30,000 of the development fee is paid upon the funding of the clinic and is deemed earned at the time the clinic opens. The remaining balance of $30,000 is payable in six (6) equal monthly installments of $5,000 commencing the month following the opening of the clinic and is recognized monthly during the month the service is rendered. The management service fee is equal to six percent (6%) of the clinic’s “monthly net revenues” with a monthly minimum of $5,000 and is recognized monthly during the month the service is rendered. During the nine months ended September 30, 2021, MID generated approximately $0.1 million of revenue.

Product revenue

In addition to revenue from services, the Company also generates revenue from the sale of the Vivos System, appliances and preformed guides to its customers, the VIPs. Revenue from the appliance sale is recognized when control of product is transferred to the VIP in an amount that reflects the consideration it expects to be entitled to in exchange for those products. The VIP in turn charges the VIP’s patient and or patient’s insurance a fee for the appliance and for his or her professional services in measuring, fitting, installing the appliance and educating the patient as to its use. The Company is contracted with the VIP for the sale of the appliance and is not involved in the sale of the products and services from the VIP to the VIP’s patient.

The Vivos System appliance is similar to a retainer that is worn after braces are removed. Each appliance is unique and is fitted to the patient. The Company utilizes its network of VIPs (currently mainly in the United States but also in Canada) to sell the appliances to their patients as well as in two centers that the Company operates. The Company utilizes third party contract manufacturers or labs to produce its appliances and preformed guides. The manufacturer designated by the Company produces the appliance in strict adherence to the Company’s patents, design files, protocols, processes and procedures and under the direction and specific instruction of the Company, ships the appliance to the VIP who ordered the appliance from the Company. All of the Company’s contract manufacturers are required to follow the Company’s master design files in production of appliances or the lab will be in violation of the FDA’s rules and regulations. The Company performed an analysis under ASC Topic 606-10-55-36 through 55-40 and concluded it is the principal in the transaction and is reporting revenue gross. The Company bills the VIP the contracted price for the appliance which is recorded as product revenue. Product revenue is recognized once the appliance ships to the VIP under the direction of the Company.

The Company operates two dental centers of its own in Colorado and manages one in Utah through a management service agreement. Within each center, the Company utilizes a team of medical professionals to measure, order and fit each appliance. Upon scheduling the patient (which is the Company’s customer in this case), the center takes a deposit and reviews the patient’s insurance coverage. Revenue is recognized differently for our Company owned centers than for its VIPs. The Company recognizes revenue in the centers after the appliance is received from the manufacturer and once the appliance is fitted and provided to the patient. Owning and operating dental centers was the Company’s business model prior to 2018, when the VIP program was established and evolved into the Company’s primary business model.

The Company offers its Clinical Advisors (i.e., dentists, who help the VIPs with technical aspects of Company products) discounts from standard VIP pricing. This is done to help encourage the Clinical Advisors to purchase Company products for their own practices. In addition, from time to time, the Company offers “buy one get one” offers and other credits to incentivize VIPs to embrace Company products and increase volume within their practices.

The Company’s revenue from contracts with customers is shown in the table below:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue
Product revenue:
Appliance sales to VIPs	$	1,583,782	$	1,281,428	$	4,497,618	$	3,218,153
Center revenue		134,487		92,356		344,348		295,063
Total product revenue		1,718,269		1,373,784		4,841,966		3,513,216
Service revenue
VIP		2,327,052		1,735,699		6,430,951		5,787,245
Billing intelligence services		247,500		172,992		668,332		427,557
Management service revenue (includes MID)		90,000		-		223,000		-
Sponsorship/seminar/other		163,122		9,127		326,331		31,279
Total service revenue		2,827,674		1,917,818		7,648,614		6,246,081
Total revenue	$	4,545,943	$	3,291,602	$	12,490,580	$	9,759,297

Costs of obtaining the contract

The Company does pay commission-like bonuses to certain employees and others to incentivize sales growth. The Company recognizes these incremental costs of obtaining a VIP contract as an expense when incurred since the amortization period of the asset that the Company would have otherwise recognized would be amortized over a period of less than one year.

Contract Balances

When timing of the Company’s delivery of product is different from the timing of the payments made by customers, the Company recognizes either a contract asset (performance precedes customer payment) or a contract liability (customer payment precedes performance). Contracts are often paid in arrears and are recognized as receivables after the Company considers whether a significant financing component exists.

Payment on product revenues is typically paid by credit card upfront. Payment on service revenues in 2021 and 2020 was sought up front and for training to be received, a minimum deposit is required. In some cases, the Company allowed installment plans to entice additional dentists to become VIPs.

The opening and closing balances of the Company’s contract liability for the three months and nine months ended September 30, 2021 and 2020, respectively, are as follows:

	2021			2020
Beginning balance, January 1	$	2,937,992		$	2,947,565
New contracts		1,617,392			1,217,106
Revenue recognized		(1,753,031	)		(1,540,145	)
Ending balance, March 31	$	2,802,353		$	2,624,526
New contracts	$	3,663,089		$	2,931,795
Revenue recognized		(2,350,868	)		(2,511,401	)
Ending balance, June 30	$	4,114,574		$	3,044,920
New contracts	$	1,908,945		$	1,834,489
Revenue recognized		(2,327,052	)		(1,735,699	)
Ending balance, September 30	$	3,696,467		$	3,143,710